SMITH V.

CIR
TERRITORIALITY

FACTS

Smith is a citizen of the United States and employed as a controller of Coastal Subic Bay Terminal
Inc in 1998. Coastal Subic Bay Terminal Inc. is a business entity located within the Special
Economic Zone and was issued by the Subic Bay Metropolitan Authority a Certificate of
Registration and Tax Exemption on December 1997.

In 1999, Smith filed his annual income tax return and paid compensation income taxed for the
income he derived from his employment with Coastal Subic Bay Terminal Inc. In 2001, Smith filed
a written claim for refund with the BIR on the ground that the payment of tax on his
compensation income was erroneous. As there was no immediate action on his claim for refund
and the two-year prescriptive period was about to lapse, petitioner elevated his case to this court
by way of Petition for Review

ISSUE

1. Whether or not aliens working within the Subic Special Economic Zone are subject to
Philippine income taxes on income earned from such employment; 

2. Whether or not petitioner is entitled to a refund or tax credit for income taxes paid 
 on
compensation earned from working within the Subic Special Economic Zone; 

3. Whether or not Section 12 (c) of Republic Act No. 7227 applies to petitioner. 


HELD

1. Yes. Individual aliens employed within the Subic Special Economic Zone (SSEZ) are not
exempt from the awesome power of Philippine taxation especially so that they sourced
out their earnings from within the Philippines. The SSEZ, being within the territorial
boundaries of the Philippines, the aliens residing therein, who enjoy the benefits and
protection from the said state are not exempt from contributing their share in the running
of the government. They have the bounden duty to surrender part of their hard-earned
income to the taxing authorities. NIRC, being a general law, it covers all persons,
properties and privileges, which are found within its jurisdictional limit. With the
enactment of RA 7227, there carne an exception to the general rule. Being a special law,
it over the general law but only in so far as a certain group of persons or things is
concerned. Since the law, in granting tax incentives, only made menti011 of businesses
and enterprises within the SSEZ, it follows then that said RA 7227 operates only on the
said group. As no mention was made to individual taxpayers being tax-exempt, it follows
that they still fall within the ambit of the general law pursuant to the maxim excepto
 firmat regulam in casibus non exceptis, a thing not being excepted must be regarded as
coming within the purview of the general rule.
2. No. Resident aliens within the SSEZ are still subject to the NIRC as far as their income from
within the Philippines is concerned. Accordingly, no refund of the said tax can be granted
to petitioner
3. No. A close reading of Section 12 (c) would reveal that the exemption from taxes, local or
national, is actually intended to benefit only those registered businesses and
establishments operating within the territory and not to individual taxpayers working
within its parameters. The grant of said incentive is premised on the fact that the influx
of new investments in our economy could very well meet the country's avowed policy of
accelerating economic growth and development.

RA 7227 - Section12. Subic Special Economic Zones.-

(c) The provision of existing laws, rules and regulations to the contrary notwithstanding,
no taxes, local and national, shall be imposed within the Subic Special Economic Zone.
In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone shall be remitted to the
National Government, one percent. (1%) each to the local government units affected by
the declaration of the zone in proportion to their population area, and other factors. In
addition, there is hereby established a development fund of one percent (1%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic Zone
to be utilized for the development of the municipalities outside the City of Olongapo and
the Municipality of Subic, and other municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemption
privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the
latter (Emphasis ours).